And while I’m talking with people at Generous Giving about alternatives to 501(c)(3)s, C____, the attorney we engaged for–and then quickly sought to disengage from–our potential move to 501(c)(3) status, sent a reply to my “disengagement” email. As you may recall, I said, “Before we (i.e., you and your associates) go anywhere [with this idea of researching potential charitable purposes for a 501(c)(3)], . . . I sense I should raise a few questions that came up from a conversation I had yesterday with L____, our CPA.”

So here’s how she replied:

[A]ll of the issues you raise are real. The crux is whether the risk is worth the benefit. J_____ [your legacy planner] has demonstrated the benefit. L____ [your CPA] has highlighted the risks. I indicated that finding an acceptable tax exempt purpose is necessary to minimize the risk. If we can, I agree with J____. If we cannot, I agree with L____.

Ultimately, the decision will be yours and Sarita’s. Depending upon your assessment of and comfort with the risk, your decision may be different from any of your advisors.

Let me now address some specifics:

J_____ and I have already discussed UBTI. Anything that produces income and is not related to the tax exempt purpose is generally UBTI. You can generally deduct the costs of creating UBTI. The UBTI is taxed at corporate rates, which might be higher or lower than your individual (pass-through S-corp) rates. L____ should be able to advise you on the numbers. Having UBTI will not, of itself, cause the revocation of your tax exempt status.

I was unaware of the subsidiaries, divisions and new prospects. I will need a corporate structure to work with to determine an appropriate structure for one or more tax exempt entities. There is a possibility of separating the exempt from the taxable entities or creating taxable subsidiaries of the tax exempt entity. These are all very intricate deals that require much technical tax work.

As for the “no going back” if you get tax exempt status and the Service finds something wrong with the activities, L____ is correct that getting tax exempt status is not the end. A public charity gets an advance ruling of tax exempt status and the Service then reviews the operations after 5 years.

If activities performed were not for a tax exempt purposes, the Service can revoke tax exempt status and cause all past income to be taxed with penalties and interest. However, if you only have business activities that are not tax exempt, you can prospectively create them as separate taxable entities, or sever them from the tax exempt entity before any IRS action.

L____ is correct that you cannot convert a complete tax exempt entity back to a taxable entity. The law requires that all assets of a non-profit corporation be contributed upon dissolution to other tax exempt entities.

I hope this helps you evaluate the possiblities.

C_____

Whoa!

Very much more complex than what J____ seems to think!

• I was unaware of the subsidiaries, divisions and new prospects. –Yowzie! So–because he doesn’t know the intricacies of 501(c)(3) law? because he was so cocksure of his abilities? because C____ didn’t ask? because ______????– . . . So for whatever reason, J____ failed to communicate the details that could “make” or “break” this legacy plan.
• There is a possibility of separating the exempt from the taxable entities or creating taxable subsidiaries of the tax exempt entity. These are all very intricate deals that require much technical tax work. –But that–avoiding all the intricate, delicate, technical details–seems to be what J____’s proposal was supposed to be all about, isn’t it? I mean, we have already created a few non-profits. And if we were really interested in creating more, I think we understand the basic outlines of what may be involved. But I think we are getting to the point where we want our lives to be a bit simpler, less complex, fewer structures (or, at least, no more structures!) than what we have and where we are right now. . . .

So if I were to summarize, it sounds as if there is no way we can move all of InquisiCorp, operations (many of them contained in subsidiary organizations whose financial affairs get rolled up into InquisiCorp) . . . –There is no way we can move all of those operations into a single 501(c)(3). No way.

. . . One big cautionary item that comes out of this: Ultimately, no matter what counsel we receive, the buck stops with us, the owner/donors. If J____’s advice proves unworkable (as I am becoming convinced, more and more, it really is unworkable), he won’t have to pay any of the taxes or penalties incurred as a result of his bad advice; it will be Sarita and me. And, meanwhile, we will have paid all the fees for his and C____’s, and whoever else’s, advice we have been relying upon!

If nothing else, this tells me I need to–we need to “go slow” or “proceed with caution”–a whole lot more caution, and a whole lot slower than I’ve been hoping for and than J____’s plan seems to suggest. (After all, he didn’t suggest we needed any additional legal counsel or advice to look over his plan with any further jaundiced eye, any skepticism. His counsel was/is all about getting competent legal counsel to draft the documents:

We cannot emphasize strongly enough the importance of the proper drafting or revision of the various legal documents that will be making up your new Master Stewardship Plan. . . . Many of these instruments are extremely specialized and the attorney you choose to work with must be prepared to expeditiously and competently draft these very technical documents without considerable, additional research. With this in mind, we are proposing that you consider choosing one of the two options below.

Option 1

Retain competent, local, legal counsel to draft the needed legal documents. Whomever you choose should specialize in drafting advanced estate and charitable planning documents.
   (1.) A competent legal expert will be able to draft these documents in considerably less time and expense because he/she is already intimately familiar with these kinds of documents and the various nuances that make them so technically complex. . . .
   (2.) You can have confidence that every detail and option has been carefully considered and either included or excluded from your custom drafted documents. In other words, you can be certain that because these documents have been drafted by a specialist, each document is designed properly.
   (3.) You will be able to rest assured knowing that these estate planning documents have been properly drafted and will accomplish precisely what you have intended for them to do, both during your lifetime and beyond. We do not want any of our clients to become “irrevocably” unhappy because, to their dismay, they find, after one of their irrevocable legal documents has been signed into effect, that it was misdrafted and now they have no option but to just live with the mistake.

Option 2

If you feel strongly about getting a second opinion from another attorney to assist in the drafting [of] the needed legal documents to implement your plan, you are certainly free to do so. We have long time relationships with attorneys who specialize in drafting these sophisticated documents. We would suggest that if you feel this is necessary, you retain a specialist to create the documents and have him/her work in conjunction with local counsel who can then review and excite the documents.

–All about drafting. Nothing about evaluating. Is the plan itself valid? J____ seems to have no questions. Our attorney and CPA are, supposedly, “fully supportive of” what he proposes. . . . Except, as L____ made clear on Monday, that’s not the case at all! . . . And now C____, the local attorney with whom J____ says he has had a “long time relationship” and who “specialize[s] in drafting these sophisticated documents”–even C____ has noted that she was “unaware of the subsidiaries, divisions and new prospects.” –What would have happened to us if I hadn’t kept pushing?

Very distressing!

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This entry was posted on Friday, April 18th, 2008 at 5:33 pm and is filed under estate planning, legacy planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.